Resolving Conflicts with Alternative Dispute Resolution: Elevating Diplomacy in Business Contracts

Key Takeaways:

• Alternative dispute resolution is a powerful resource in a contract drafter’s toolkit.
• Arbitration is a creature of contract, ADR terms that should be considered before disputes arise.
• Thoughtful ADR terms provide more control over disputes that impact your business.

Arbitration is a creature of contract. But alternative dispute resolution (“ADR”) language–including arbitration, mediation, and negotiation–isn’t often prioritized until it’s too late. Usually, this happens only after a dispute arises. Parties often underestimate the value of ADR as a risk management tool, a first line of defense, a means for greater control over litigation outcomes and impacts, and a way to preserve business relationships as well as a company’s reputation.

With the added benefits of efficiency and economy, ADR is a powerful resource in a contract drafter’s toolkit. Counsel would be wise to strategize robust ADR language early in the business relationship, during contract negotiations, and before a dispute arises.

What is Alternative Dispute Resolution?

Alternative Dispute Resolution refers to the process of resolving disputes privately, outside of the courtroom. The most common methods of ADR are arbitration, mediation, and negotiation. In many disputes, parties use each of these techniques to achieve resolution. In other disputes, one technique may be more effective for resolution over the others.

According to the American Arbitration Association, “Arbitration is the out-of-court resolution of a dispute between parties to a contract decided by an impartial third-party [or parties] for a binding decision.” Generally, parties consent to arbitrate disputes in their contractual agreements.

How Do Mediation and Negotiation Differ From Arbitration?

Mediation is a less formal dispute resolution process involving a neutral third-party mediator who evaluates a dispute and facilitates communications between parties to help them agree on a solution. Unlike arbitration, mediation does not involve a decision on the merits and is not binding on the parties.

Negotiation is the most common and least formal technique to resolve disputes, which does not require a neutral third party. In negotiation, parties communicate directly with one another to find solutions to their claims or differences.

Why Choose Arbitration for Your Contracts?

Arbitration is widely accepted to resolve commercial, consumer, and employment disputes in sectors ranging from technology to life sciences, construction, healthcare, and financial services. In international commerce, arbitration is the preferred means to resolve disputes in cross-border business-to-business transactions. Arbitration may be favored by businesses for a variety of reasons–including bespoke and flexible offerings, expeditious process, significant cost savings over litigation, the finality it provides parties, and the confidential aspect that safeguards business assets and information.

The Benefits of Alternative Dispute Resolution (ADR)

Having practiced law for many years, first with an Am Law 100 firm and then various public companies, I have observed first-hand the impact ADR can have on a business.

Arbitration in Complex Disputes

In one matter, my firm served as arbitration counsel representing a nationwide retailer in a complex labor dispute. A union representing thousands of retail workers filed an arbitration demand to resolve various wage-related disputes. In a matter of months, both parties were able to present their concerns to an experienced labor arbitrator. The arbitrator conducted a three-day hearing and reviewed testimony and evidence from each party, then ruled in our client’s favor.

In this case, the expeditious award provided both the business and the workers with clarity and certainty on critical issues. In addition, the arbitration process prevented business disruptions and greater impacts on business operations. The business was able to contain the uncertainties of litigation, minimize legal fees, and preserve their relationship with their workforce as a result of the efficient, out-of-court process.

Arbitration in “Bet the Company” Litigation

A “bet the company” lawsuit is a high stakes litigation that poses significant risk to the company’s survival. I once served as in-house litigation counsel for a wireless technology company seeking to avoid bankruptcy and simultaneously secure acquisition in a superfast, fiercely competitive, highly regulated industry. The business also had a significant litigation docket and potential exposure from bet the company consumer class actions. The business’s strategic plan had no room for prolonged and uncertain litigation – not to mention, its risk profile was an impediment to acquisition.

In the midst of a contested acquisition, a team of defense lawyers, coverage counsel, and plaintiff’s class action counsel worked with a mediator for several weeks to resolve a bet the company litigation. Notably, the team structured a creative solution with the limited assets available and cleared the risk profile just in time to enable the business’s primary objective – acquisition.

By pursuing a tailored ADR process in this case, the business was able to salvage its assets, control its strategic plan, and eliminate risk and potentially nuclear verdicts. Significantly, the business was able to focus on its purpose, to maximize profits, and create shareholder value.

Learn More: Mandatory Arbitration Clauses, Beyond Just Boilerplate

Business Diplomacy and Collaboration Through Arbitration

In my capacity as an arbitrator and mediator, I’ve observed the positive impact of ADR on businesses. For example, I’ve noticed businesses preserve and maintain long-term relationships and competitive advantages by using arbitration and mediation time and again throughout the course of their dealings.

Similarly, when parties include alternative dispute resolutions in their merger and acquisition agreements, their dealings are often more diplomatic and collaborative. This approach to dispute resolution improves the likelihood of achieving your ultimate goal – closing the transaction.

In disputes involving sensitive information or intellectual property, businesses can safeguard confidentiality through private, out-of-court arbitration. Additionally, in disputes involving employees and consumers, arbitration provides claimants an opportunity to be heard and at the same time share their experiences in a private, less intimidating forum and address their concerns.

Lastly, I’ve observed that when effective arbitrators carefully manage the custom dispute resolution process developed by the parties, there is less opportunity for the gamesmanship and acrimonious bickering commonly encountered in litigation. Instead, the focus remains on the actual dispute and achieving an efficient resolution that’s in the parties’ best interest.

ADR Language in Contractual Agreements

To maximize the benefits of alternative dispute resolution, parties should plan their dispute resolution process during the formation of their contractual agreement. Arbitration is a creature of contract and an arbitrator’s authority stems from the terms included within an agreement.

Learn More: How to Draft an Arbitration Clause: 4 Key Considerations

Parties should include the following language for an effective arbitration agreement:

• The tribunal rules that will govern the arbitration – for example, the AAA Commercial Rules;
• The location of where evidentiary hearings will be conducted;
• The state law that will govern the arbitration procedure;
• The number of arbitrators that will decide the dispute and their qualifications; and
• What claims the arbitrator is authorized to decide, including attorney fees and arbitration costs.

For further guidance, the American Arbitration Association also has an AI tool, ClauseBuilderAI, that uses AI language to assist parties in drafting arbitration agreements.

Sara Blakely, Inventor and Founder of Spanx, says, “Business is not war.” In business dealings, alternative dispute resolution fosters diplomacy and empowers businesses to move from conflict to resolution. In sum, arbitration, mediation, and negotiation are good for business. By including thoughtful ADR agreements in commercial contracts, businesses can control risks, contain crisis, and serve the client’s best interest.